Prudential Regulation Development by Islamic Financial Services Board (IFSB)

1. Prudential Regulation Development by Islamic Financial Services Board (IFSB) October 30, 2009 Zahid ur Rehman Khokher Assistant Project Manager

2. Outline Of The Presentation • This presentation aims to provide: • Overview of the current regulatory environment of institutions offering Islamic financial services (IIFS) • Overview on the IFSB • Process of Standards Development

3. Regulatory Environment of Islamic Financial Services Industry… (1) – Legal framework of IIFS Some countries like Iran, Kuwait, Malaysia, Sudan, Turkey, UAE and Yemen have enacted specific laws to regulate the establishment of IIFS. Specific Laws Laws regulating IIFS Same laws of conventional banks In other countries, IIFS are established by the same laws of conventional banks. In all the countries in which they operate, IIFS are supervised by their respective supervisory and regulatory bodies. Supervision of IIFS

4. Regulatory Environment of Islamic Financial Services Industry … (2)– Prudential regulations of IIFS In some countries, the regulation and supervision of Islamic banks is carried out by rules specificallydeveloped for IIFS. Specific rules Same rules for conventional banks In other countries, IIFS are subject to the same prudential rules that govern their conventional counterparts. Dual Approach In many countries, regulators have issued some specific prudential rules for IIFS (licensing, reserve requirements, reporting etc.) but in other matters same rules are being applied as for conventional banks

5. Regulatory Environment Of Islamic Financial Services Industry … (3)– Implications of the present framework • The scenarios, described in earlier slides, have resulted in lack of level playing field for IIFS and the industry as a whole. • Furthermore, since the distinctive characteristics of Shari’ah-compliant financial transactions raise a number of issues related to the risks borne by the institutions offering those services, failure to adequately recognise and supervise these risks, could impose systemic risk to the entire financial system and jeopardise the stability and soundness of the industry. • Hence, the need to develop uniform prudential and best practices standards that are tailored to the specific characteristics of these institutions is vital.

6. Establishment Of The IFSB • The IFSB was the culmination of an extensive two-year consultative process initiated by a group of governors and senior officials of central banks and monetary authorities of various countries, together with the support from the Islamic Development Bank (IDB), the International Monetary Fund (IMF), and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) • It was officially inaugurated on 3rd November 2002 • Malaysia has been selected as its host country • It started operation in March 2003 • Has been granted immunities and privileges that are accorded to diplomatic missions and international organisations

7. What Is The IFSB? • The IFSB is an international standard-setting body of the regulatory and supervisory agencies that have vested interest in ensuring the soundness and stability of the Islamic financial services (IFS) industry, which is defined broadly to include: • Banking • capital market, and • insurance.

8. What Does The IFSB Envisage? • The IFSB is envisaged to complement the prudential framework set out by: • Bank for International Settlements – Basel Committee on Banking Supervision (BCBS) • International Organization of Securities Commissions (IOSCO) • International Association of Insurance Supervisors (IAIS)

9. Develop new standards or adopt existing standards & recommend its implementation Provide guidance on effective supervision and regulation Establish cooperation with international standard-setting bodies & member countries Enhance & coordinate initiatives to develop instruments and procedures for efficient operation and risk management Encourage cooperation among member countries Facilitate capacity-building and development of human capital Undertake research and publish studies and surveys on, the Islamic financial services industry Establish database of Islamic banks, financial institutions and industry experts Miscellaneous objectives agreed by the General Assembly Objectives of IFSB

10. Organisational structure The representative body of all the members of the IFSB namely, Full Members, Associate Members and Observer Members. General Assembly The senior executive and policy making body of the IFSB. It shall consists of one representative from each Full Members who shall be the senior executive officer of that Full Member or such other senior person nominated to represent him from time to time. Council Members The body responsible for advising the Council on technical issues within its terms of reference (as determined by the Council). It shall consists of up to 15 persons selected by the Council and shall have a term of office of three years. Secretariat Technical Committee The permanent administrative body of the IFSB. It is headed by a full-time Secretary-General appointed by the Council on such terms and conditions determined by the Council. The Secretariat is based in Kuala Lumpur, Malaysia. Working Group / Task Force • Working Group is a committee established to be responsible for drafting standards and/or guidelines. • Task Force is a committee established to be responsible for undertaking ad-hoc tasks. 10

11. Membership categories Full Member (voting rights) • Available to: • the supervisory authority responsible for the supervision of the banking, securities and/or insurance/takaful industries of each sovereign country • inter-governmental international organisations that have an explicit mandate for promoting Islamic finance and markets Associate Member (no voting rights) • Available to: • any central bank, monetary authority or financial supervisory or regulatory organisation • international organisation • which does not qualify for Full Members status or which does not seek to become a Full Member Observer Member (no voting rights) • Available to any: • national, regional or international professional or industry association; • institution that offers Islamic financial services; or • firm or organisation that provides professional services, including accounting, legal, rating, research or training services to any above institution

12. Full Membership • Qualifies for the membership of the Council; • Right to attend, participate and vote at all meetings of the General Assembly; • Formulates and approves the policies and strategies of the IFSB; • Adopts and approves for issuance prudential and supervisory standards; • Right to appoint the Technical Committee, and the Secretary-General; • Admits new members to the IFSB.

13. Associate Membership • Right to attend and participate in all meetings of the General Assembly • Priority list to participate and speak in seminars, conferences, workshops and meeting organised by the IFSB, and, where applicable, at a reduced fee • Preference to be selected to join the working groups that are formed by the IFSB to prepare prudential and supervisory standards • First-hand disclosure of information from the Secretariat of the IFSB • Prestige of being associated with an international Islamic standard-setting organisation.

14. Observer Membership • Right to attend all meetings of the General Assembly • Priority list to participate and speak in seminars, conferences, workshops and meeting organised by the IFSB, and, where applicable, at a reduced fee • First-hand disclosure of information from the Secretariat of the IFSB • Prestige of being associated with an international Islamic standard-setting organisation.

15. Membership of IFSB 193 Members From 37 Countries By membership type By organisational demarcation Full Member 25 Regulatory / supervisory authorities 46 Associate Member 20 Inter-governmental organisations 6 Observer Member 147 Financial institutions and professional firms 141 193 193 Membership as at October2009

16. Regulatory and Supervisory Authorities 24. State Bank of Pakistan 25. Bangko Sentral ng Pilipinas 26. Banque du Liban Lebanon 27. Bursa Malaysia Berhad 28. Capital Market Development Authority Maldives 29. Emirates Securities and Commodities Authority 30. Financial Services Commission Mauritius 31. Hong Kong Monetary Authority 32. Khartoum Stock Exchange Sudan 33. Labuan Offshore Financial Services Authority Malaysia 34. Malaysia Deposit Insurance Corporation 35. Palestine Monetary Authority 36. People‘s Bank of China 37. Qatar Financial Centre Regulatory Authority 38. Securities and Exchange Commission of Pakistan 39. The Insurance Supervisory Authority Sudan 40. Da Afghanistan Bank 41. Financial Services Commission & Financial Supervisory Service Korea 42. Insurance Commission of Jordan 43. Japan Securities and Dealers Association 44. Ministry of Economy and Finances Senegal 45. Securities and Futures Commission Hong Kong 1. Bangladesh Bank 2. Bank Indonesia 3. Bank Negara Malaysia 4. Bank of Mauritius 5. Banque Centrale De Djibouti 6. Capital Market Authority of Saudi Arabia 7. Central Bank of Bahrain 8. Central Bank of Egypt 9. Central Bank of Jordan 10. Central Bank of Kuwait 11. Central Bank of Nigeria 12. Central Bank of Sudan 13. Central Bank of Syria 14. Central Bank of the Islamic Republic of Iran 15. Central Bank of the United Arab Emirates 16. Dubai Financial Services Authority 17. Maldives Monetary Authority 18. Ministry of Finance, Brunei 19. Monetary Authority of Singapore 20. Qatar Central Bank 21. Qatar Financial Markets Authority 22. Saudi Arabian Monetary Agency 23. Securities Commission of Malaysia

17. Inter-Governmental organisations • 6 international inter-governmental agencies: • Islamic Development Bank (IDB) • International Monetary Fund (IMF) • The World Bank (WB) • Bank for International Settlements (BIS) • Asian Development Bank (ADB) • Islamic Corporation for the Development of Private Sector (Subsidiary of IDB)

18. Implications of the Establishment Of The IFSB • Supervisors and regulators are now strongly committed to embark upon collective and systematic efforts to develop supervisory and prudential infrastructure for this industry • Support the transfiguration of the industry from one that is regulated on an ad hoc basis to an industry that is based on a framework which caters for its specificities, thereby enabling it to earn the respect of international organisations that are mandated to enhance the soundness and stability of the global financial system • Concerned regulators will be able to adopt an international approach to regulation and supervision thereby enabling the industry to be part of today’s global financial world • Ease the fears and misunderstanding of this industry amongst some regulators

19. IFSB Standards and Publications

20. IFSB Published Standards • IFSB-1: Guiding Principles of Risk Management for IIFS (December 2005) • IFSB-2:Capital Adequacy Standard for IIFS (December 2005) • IFSB-3: Guiding Principles on Corporate Governance for IIFS (December 2006) • IFSB-4: Disclosures to Promote Transparency and Market Discipline for IIFS (December 2007) • IFSB-5: Guidance on Key Elements in the Supervisory Review Process of IIFS (December 2007) • IFSB-6: Guiding Principles on Governance for Islamic Collective Investment Schemes (January 2009) • IFSB-7: Capital Adequacy Requirements for Sukuk, Securitisations and Real Estate investment (January 2009) • GN-1: Guidance Note In Connection with the Capital Adequacy Standard: Recognition of Ratings by External Credit Assessment Institutions (ECAIs) on Shari`ah-Compliant Financial Instruments (March 2008)

21. Exposure Drafts • ED8: Guiding Principles on Governance for Islamic Insurance (Takâful) Operations (December 2008) • ED9: Conduct of Business for IIFS (December 2008) • ED10: Guiding Principles on Sharî`ah Governance System (December 2008)

22. Other Publications • TN-1: Technical Note on Issues in Strengthening Liquidity Management of IIFS: The Development of Islamic Money Markets (March 2008) • Compilation Guide on Prudential and Structural Islamic Finance Indicators: Guidance on the Compilation and Dissemination of Prudential and Structural Islamic Finance Indicators for Banking and Near-Banking institutions offering Islamic financial services (November 2007) • IFSB-IDB: Islamic Financial Services Industry Development: Ten-Year Framework and Strategies (May 2007) • Issues in Regulation and Supervision of Takaful (Islamic Insurance) by IFSB and International Association of Insurance Supervisors (August 2006 )

23. Due Process for Development of Standards Preliminary Exposure Draft (ED) Issuance of ED by TC Technical Committee (TC) TC approval on ED Working Group (WG) Sharī`ah Meeting Approval by TC Sharī`ah Meeting Public Hearing & Workshops Issuance of prudential Standards Final Approval by Council Amendments by Working Group 23

24. The IFSB is actively involved in the promotion of awareness of issues that are relevant or have an impact on the regulation and supervision of the Islamic financial services industry. Awareness Programmes and FIS Workshops Summit Int. Conferences Seminar Forum Interactive Session This mainly takes the form of international conferences, seminars, public lectures, dialogue sessions, forums and meetings staged in many countries. Public Lecture Website www.ifsb.org is the main communication tool for the IFSB to disseminate information to members and stakeholders. • The FIS Workshop initiative was initiated in November 2007. • To date, the IFSB has held workshops in 15 member countries 24

25. Thank you for your attention Zahid ur Rehman Khokher Assistant Project Manager Islamic Financial Services Board Telephone: +603 2698 4248 Ext. 139 Fax: +603 2698 4280 Email: zahid@ifsb.org Webpage: www.ifsb.org Address: Bank Negara Malaysia Building, 3rd Floor, Block A , Jalan Dato’ Onn, 50480 Kuala Lumpur, Malaysia